Following the death of my mother-in-law, her home was sold at below market value and our portion was 27500.00. are we required to pay taxes on that amount?

[moore-je]

are we required to pay inheritance tax?

[DianeW · Accepted solution]

The inheritance itself is not taxable on your personal income tax return. The estate is a separate tax issue.  Federal estate tax For 2017, is the estate and gift tax exemption is $5.49 million per individual.  The state law is what important as far as estate or inheritance tax.  Use this link for more information.  What are Inheritance Taxes?

If you used the property for personal purposes, then a loss would not be allowed, but if only your mother-in-law used the property the loss will be allowed and will offset your other income.  (If you had sold it for more than the FMV, meaning you made a gain, then the gain would be taxable).

Your Cost Basis determination:

A home's tax basis is determined in a different way when someone inherits a home after the owner dies. When you inherit property after the owner dies you automatically receive a "stepped-up basis." This means that the home's cost for tax purposes is not what the now-deceased prior owner paid for it. Instead, its basis is its fair market value at the date of the prior owner's death. This will usually be more than the prior owner's basis.

The bottom line is that if you inherit property and later sell it at a gain, you pay capital gains tax based only on the value of the property as of the date of death.

You can enter the sale of that inherited property by entering it using the directions below (as a sale of investment) JUST REMEMBER TO ENTER ONLY YOUR SHARE OF THE AMOUNTS:

In TurboTax use these steps after you sign into your account.

• Federal Taxes Tab
• Wages & Income
• Scroll to Investment Income
• Show more
• Stocks, mutual funds, bonds, other
• Follow the prompts
• Type of investment would be "everything else"
• Description
• Select Inheritance (important - it's always considered held long term which provides a special tax break)

[Edited: 02.16.2018 | 6:30 AM]

[jtax]

Just to clarify, the Federal tax is on the estate total (over $5.5M), not the inheritance. The estate pays that. An inheritance tax is paid by the heirs based on what they receive. There is no federal inheritance tax. Some states have an inheritance tax, but not many. They have much lower exemptions and frequently distinguish between kinds of heirs (spouses, siblings, etc.) More states have an estate tax (on what is given) with much lower exclusion limits than the Feds.

[moore-je]

you haVEN,T ANSWERED THE QUESTION!   DO WE NEED TO INCLUDE THE 27500. ON THE TAX RETURN?

[jtax]

Yes, you need to include the sale on your return. The question (see my answer) is whether or not it is the sale of a "home" (a personal use asset for which you cannot use  the loss to offset other income) or whether it is the sale of a capital (investment) asset for which you can use the loss to offset other income.

[moore-je]

WHERE IS IT INCLUDED?   THERE HAVE BEEN NO PROMPTS TO ADD THE INCOME.

[jtax]

This answer above describes where to put it if it is a personal use asset. If it is a capital asset see below for how to report it. This is not a black and white issue and you may need legal advice to determine how to report it. If the amounts are not large you can report it a personal use property and be done with it, but you have other options.

<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/replies/5167587">https://ttlc.intuit.com/replies/5167587</a>

[DianeW]

@moore.je  I've added steps that will make it easier for you.

[DianeW]

@jtax Thank you for the assistance.

[jtax]

@TurboTaxDianeW no problem. This is a not obvious grey area.

[moore-je]

WHAT HAPPENS IF I DID NOT RECEIVE A 1099 FORM?

[DianeW]

@moore.je Nothing changes, we are required to report income with or without an income document.
The sale would provide you with the necessary documentation should there ever be a question. You can obtain a fair market value from the sale of homes similar to this one to validate your valuation if you don't have one from a lawyer or relator on the date of death.

[jtax]

If there was no personal use of the property after your mother-in-law's death, you may be able to deduct the loss because it the property may not have been a personal use asset but rather a capital asset. The IRS has fought this before, doesn't like it, but they have lost several court cases. It is complicated and it would be best if you sought the advice of a tax attorney to verify that the facts of your case fit closely to the facts of the winning cases and how well. That is a legal judgment.